When all else fails, distraught individuals and businesses resort to the last resort of debt reduction strategies: bankruptcy. Due to mountainous credit card debts and other balances, creditors may bombard a borrower with collection calls. On the other hand, businesses may fail to earn enough to satisfy their creditors as well.
Many businesses can shut their doors due to inadequate earnings. Worse, they may earn none at all. As a result, they may furlough or fire their staff. With no other options, bankruptcy may be your last-ditch attempt.
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What is Bankruptcy
In a nutshell, it is a legal procedure that helps people and businesses who can’t repay their debts. It involves submitting a petition to your bankruptcy court, applying for a type specified in the bankruptcy code. You may request for Chapters 7, 11, or 13, but the court has the final word on which will be acceptable.
To declare bankruptcy, compile all your financial records and find a credit counselor first. Then, bankruptcy laws require a mandatory consultation with a counseling agency approved by the United States Court for 180 days. Courts ensure that all possible alternatives are considered before proceeding.
Once your petition is approved, you will be assigned to a court trustee. He will require you and your creditors to meet and discuss your bankruptcy case. You have to attend the meeting, but your creditors may choose not to. Then, the next steps will differ, according to the types of bankruptcy.
People usually want Chapter 7 when filing for bankruptcy. Once approved, it may absolve most, or sometimes, all of your debts. In exchange, the court may seize your assets, so you’ll have to ask permission to use them. Some debts are exempt though, such as student loans and pensions.
Unfortunately, states differ on which assets are exempt. Worse, you’ll find it harder to qualify due to tightened restrictions and requirements. Still, this is the most convenient and expedient option among the three. You’ll only take four to six months and you may even complete it after one visit.
This is an arduous procedure that is usually filed by businesses. It involves agreeing on how a company must restructure itself in order to pay back its lenders. You may file for Chapter 11 yourself, or your creditors might if you default. Again, consider other debt relief strategies, as the bankruptcy proceedings may take six months up to two years.
Submission and approval of the reorganization plan lengthen its filing. Courts provide four months for business owners to create one, and they may extend or shorten that period. Afterward, creditors may counter it with their own plans. What’s more, your case may be converted to Chapter 7, or even result in full payment from your creditors.
Remember that Chapter 11 is extremely intrusive and restrictive. It will involve providing courts with extensive information about your business. On some occasions, the court may hand its operations over to an appointed trustee. Sufficient causes for it include gross mismanagement, incompetence, or fraud.
Upon approval, the court will take control of your assets. This means you’ll have to ask their permission for using services or entering signed agreements. This procedure could result in downsizing, reducing parts of your company as recompense. Worse, it could lead to completely shutting your business down.
Bankruptcy typically involves surrendering assets, so it’s one of the debt reduction strategies that are frowned upon. However, Chapter 13 doesn’t have such conditions, making it a safe yet lengthy alternative. Like a typical debt management plan, it requires credit counseling and a time-bound payment plan.
It enables individuals to have more time to pay their debts, usually within three to five years. You will need an additional counseling session after filing. Like Chapter 7, it has strict requirements for qualification. For example, you must be capable of paying your creditors with your repayment plan.
In addition, your debts must not exceed a certain threshold. The court must also confirm good faith. Lastly, your repayment plan must adhere to bankruptcy laws. You’ll receive approval once you’ve completed the requirements.
Do You Need a Bankruptcy Attorney?
Of course, legal counsel is crucial, unlike typical debt reduction strategies. As we’ve mentioned, filing for bankruptcy is a complicated ordeal. Improper filing may result in dismissal, so you’ll have to wait six months to start over. More importantly, you’ll have better chances of success.
Thoroughly consider your choices when looking for a bankruptcy attorney. Check them out online and speak with them. Select them using the “three E’s”: empathy, experience, and expense. Also, ask people and consult reputable websites who may gauge your candidates’ performance and track record.
Alternatives to Bankruptcy
Again, consider bankruptcy as a last resort, used only when other debt reduction strategies have failed. This is a time-consuming procedure that risks your assets and transfers your control to the court. Worse, bankruptcy damages credit reports for at least ten years. Moreover, lenders may refuse to engage in transactions with you.
Try less drastic options like debt consolidation loans. You won’t be given the highest interest rates if you have good credit. Otherwise, use settlement programs to reduce your debt. Finally, you may try the do-it-yourself snowball method, paying in descending order with your smallest debt first.